How Bonds Affect Mortgage Interest Rates
Mortgage rates do not exist in a bubble. Behind every mortgage purchased, people and institutions are looking to profit by investing their money in mortgage bonds and mortgage-backed securities. As with any financial decision, financial experts look at the big picture to determine how to play their hand. It’s a lot to understand, but it can be explained relatively simply.
The Relationship Explained
As with any investment, mortgages and bonds have pros and cons. Mortgages are a form of investment that starts as investors purchasing mortgage loans as a group, or a “pool.” Institutions then hold these pools as a security or asset. Over time these pools pay themselves back, and investors profit from the mortgage interest rates the buyer pays. These are generally considered to be more “risky” – because the amount you get paid back can be influenced by the buyer’s ability to pay back the loan.
Bonds, on the other hand, are government-backed securities with a fixed, or unchanging, return on investment. Because the government secures them, bonds are considered the “ultra-safe” investing option – much safer than mortgages or stocks. Essentially, the risk vs. reward factor is a lot lower, but it’s a financially responsible way to invest your money.
As it stands, though, investors choosing either option look to gain the most return on their investment in the shortest amount of time. When the demand for bonds is higher, or the bond market becomes stronger, so to speak, mortgage rates tend to decrease in response. In that same vein, mortgage interest rates tend to get higher; this is to make the mortgage pools more appealing to investors.
What This Means for Buyers
The mortgage industry is mostly a seller’s market. This means that those who are financing and selling these mortgages to buyers control supply and demand. Buyers don’t have control over how much they’re willing or able to pay for their mortgage, save for the differences in interest rates between mortgage lenders. What buyers can do, however, is monitor the financial world and wait for the best time to get a mortgage. Having the ability to watch the markets and identify an uptick or a downswing in potential investment rates can help you find the best time to pull the trigger on committing to that sizeable financial decision.
Work with Bluepoint Mortgage
BPM provides a comprehensive line of mortgage lending products for our broker partners. We have a team of mortgage professionals waiting to help you succeed in this changing industry. We’re experts in our craft, and you can trust us to work quickly, carefully, and efficiently. Contact us today with any questions or help with securing a mortgage loan.